Tuesday, January 21, 2014

Utah’s Lowly Per Capita Personal Income in Perspective

James Robson, Senior Economist

One economic statistic for comparative purposes among the 50 states is “per capita personal income.” Per capita income is calculated by taking the states’ total personal income (all the wages, salaries, interest income, stock income, social security benefits, pensions, etc., accumulated by the state’s citizens) and dividing it by the number of men, women, and children in the state (the total population). In effect it is a mathematical ratio. The result is a measure that gives you the spending power of every man, woman, and child in the state.

The numerator comprises all the income earned by people (with the majority coming from working adults). Take note that the denominator is “total population.” That means adults and children. We know that few children work and generate income. If you have a proportionally larger number of children (non-workers) in your denominator than any other state, you will naturally have a lower per capita personal income ratio than any other state. And Utah is the state with the highest percentage of children in its denominator.

What this “math-speak” is conveying is that Utah will naturally have a lower per capita income calculation even before one considers the differences in incomes that can be earned across the states. Utah is so-to-speak behind the eight ball right out of the gate.

Utah has the youngest population of any state by far at 29.9 years in 2012. The state with the next lowest median age is Texas at 33.9 years. The U.S. median age was 37.4 years.

Since 1995, Utah’s annual per capita personal income calculation has been between 80 to 85 percent of the national average. The most recent figure published by the U.S. Bureau of Economic Analysis has Utah with per person income of $35,430, or 81 percent of the national value of $43,735. Of the 50 states, Utah ranked a lowly 46th for per capita personal income.

Many incorrectly view Utah’s low per capita income measure as an income problem. Instead, it shouldn’t even be viewed as a problem — it should instead be viewed as a difference. Take for example two families who both earn $70,000 a year. Family A consists of four people (mom, dad, two kids), and Family B has eight people (mom, dad, four kids). A per capita calculation reveals Family A has a per capita income of $17,500. Family B’s is only $8,750. Is Family B worse off than Family A? No, because both families have $70,000 to spend. Family A with fewer children will probably spend their money differently than Family B, but both have $70,000 at their disposal.

What then is the purpose of the per capita measurement? It is to bring some level of comparability between non-equal objects. You can’t compare California’s $1.8 trillion of total personal income against Utah’s $105.6 billion because California is so much bigger than Utah. But you can bring them both into some kind of perspective if you divide both totals by each state’s population, and that’s the purpose of the per capita measurement.

But the example above shows that even this comparison can lead to misperceptions. Here is the best way to apply per capita data. In the above example, we see that each family has $70,000 to spend, but they will probably spend it differently. Family B, with more kids, is going to spend its money on clothes, shoes, education, food, toys, and probably a minivan. Family A may buy nicer cloths augmented with jewelry, eat at restaurants more often, and maybe drive a Lexus. The point is that the families will spend their money differently.

In conclusion, per capita personal income is a statistical measure easily misunderstood. In Utah’s case, most people perceive its low ranking in a negative manner. But if you understand the demographic makeup of Utah in relation to other states, you will understand Utah’s low ranking is driven more by demographics than by income levels.

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